Solvency Capital Requirement (SCR) (Solvenzkapitalanforderung)
Under Solvency II, the Solvency Capital Requirement is the capital an insurer must hold to remain solvent even in the face of an extreme event with a statistical return period of 200 years.
Concept
The Solvency Capital Requirement (SCR) is, under the European Solvency II supervisory regime, the capital an insurer must hold so that it will not become insolvent within one year with a probability of 99.5%. It thus corresponds to the value-at-risk of an insurer’s own funds at that confidence level, and is colloquially described as a capital buffer against an extreme event with a statistical return period of once every 200 years.
Calculation Methods
Insurers may calculate the Solvency Capital Requirement either using the standard formula prescribed by the supervisory authority, which aggregates individual risk modules such as underwriting risk, market risk, counterparty default risk, and operational risk into an overall requirement using prescribed correlation assumptions, or by using an internal model approved by the supervisory authority, intended to more accurately reflect the insurer’s individual risk profile.
Distinction from the Minimum Capital Requirement
While the Solvency Capital Requirement marks the regulatory target level of capitalization, a breach of which triggers a recovery plan, the lower Minimum Capital Requirement (MCR) represents the absolute floor, below which the supervisory authority can withdraw the insurer’s authorization; the ratio of eligible own funds to the Solvency Capital Requirement is referred to as the solvency ratio and is disclosed as part of the SFCR.